Thursday, June 14, 2018

Bonds issuance for financing development in Tanzania


My last week’s article was about us being more innovative in engineering our finances, as is, finance play a key role in development – finance and socio-economic development are intertwined.

My focus was on the enhanced use of financial instruments, especially bonds and now because interest rates and other financial market conditions supports raising finances via issuance of bonds.

By the way what is a bond? a bond is a debt security/instrument of indebtedness of the bond issuer to the holders where the issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay them interest (the coupon) and/or to repay the principal at the maturity date.

Bonds can be issued by various private and public sector economic agents – i.e. central governments can issue sovereign bonds, or treasury bonds which are general obligation bonds, or can issue project-specific bonds i.e. bonds issued to finance specific infrastructure or industrial development projects.

Currently, we have general obligations treasury bonds, which are also listed in the stock exchange, worth about Sh9.2 trillion.

Local governments and municipalities can also issue bonds – municipal bonds, which can either be general obligation bonds – general obligation means a type of municipal bond that is secured by a local government’s pledge to use various legally available revenue resources, including taxes, levies, royalties, or any other sources to repay bond holders.

A local government may also issue a revenue specific bond for infrastructure development under the so-called Municipal Revenue bonds – these are bonds issued specifically for specific identified projects that can be repaid through a variety stream of revenue sources or cash flows emanating from the particular project financed by proceeds from bonds issuance (this can be a bus stand, or a local market, or water irrigation project, etc) – so, as opposed to the general obligation bonds, Revenue bonds are backed by a specific revenue stream, while holders of General Obligation bonds are relying on the full faith and credit of the issuing local government or municipality.

Government agents – such as water authorities, energy authorities, ports authorities, roads authorities, airport authorities, universities, housing agents, etc can also issue bonds – TanRoads, Tarura, TRL, Tanesco, Dawasco, TAA, TPA, etc may issue infrastructure bonds for their various construction or rehabilitation projects. For example, TAA could issue Airport bonds for expansion of airport terminals; or NHC may issue housing revenue bonds for low cost sustainable neighborhoods housing projects; Universities may issue students housing and dormitories bonds backed by projected rental incomes; etc.

Private sector corporate entities can as well issue bonds, and so far, that have been the case, though in small scale, our current corporate bonds market is only about Sh120 billion.

I have just read an article where the City of San Francisco, in the state of California in the US on June 8 is proposing to issue a municipal bond worth $425 Ais a general obligation bond, with benefits listed as: (i) moderately positive economic impact; (ii) will partly help finance $2.5 billion repair on the sea-wall; (iii) will create about 145 new jobs in the city; (iv) will raise the city’s GDP by about $19 billion over a 24-year period; and (v) will increase annual property tax by $13 per $100,000 assessed value.

The article concludes by saying, project benefits outweighs costs of raising finance via the Seawall bonds – hence, once authorized by the city board of supervisors and approved by two-third of voters the bonds will be good to go. On that same day, several US states and local governments were scheduled to sell about $3.4 billion in municipal bonds, and 12 universities were to issue students housing/dormitories bonds backed by projected rental income.

One of the mentioned benefit for these bonds was to give bondholders more control on the local projects while at the same time allowing local investors the opportunity to directly invest in bonds that finance socially beneficial projects – that way democratizing development ownership.

Imagining, my thinking is that these things are not difficult to implement, but probably are difficult to decide.

Once decides and put the proper legal/regulatory framework, the rest can be handled.

I am hopeful that slowly (as it is with the central government), probably one day municipalities, local governments, government agents, etc may also consider pursuing the mandates of issuing bonds where both domestic and international players can freely access. Key to this is that funds accessed via issuance of bonds – i.e. municipal bonds could not be misused or abused, rather should be channelled directly into the financing of the much-needed economic infrastructure.

Also meeting financial and contractual obligations in timely manner, competence in public finance and project management, as well as good governance and transparency are part and parcel of the process.

As I conclude: roads, ports, railways, airports, bridges, canals, recreational parks, etc in developed countries were/are largely financed with funds raised via capital markets i.e. bonds.

From records of history, big infrastructure projects have been financed with such funds -- mainly because national budgets are often unable to support the required infrastructure expenditure.

Country’s balance sheets in many cases lacks the fiscal space to accommodate the substantial financial outlays required for infrastructure development – that’s where capital markets development becomes a necessity for our growth and development agenda.

Next week’s piece will be about: if we assume for a minute that it true our borrowing and debt levels are that much high (following recent political debates on the matter), and if tax revenue collection has its own limitations as we know it has, could equity financing be a significant part of socio-economic development equation? If yes, then how? I will explain...